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I had the chance to catch up this week with Alon Hillel-Tuch, the Founder and CFO of Crowdfunding platform RocketHub (www.RocketHub.com), in New York. As we near the JOBS Act’s legalization of CrowdFund Investing(CFI) in 2013, allowing loan and equity funding to occur through crowdfunding platforms, much is left to be done and many questions remain.

Alon Hillel-Tuch, of RocketHub, meeting with the SEC

RocketHub has been working heavily with the SEC, FINRA (the Financial Industry Regulatory Agency), the Whitehouse Jobs Counsel, and has participated in conferences together with CFIRA members (CrowdFund Investing Regulatory Advocates) .

Most recently, the RocketHub team issued a second whitepaper to Congress, Senators, the Jobs Counsel, and the SEC that as of Wednesday (11/14) is available to investors and consumers as well. Unlike prior advocate efforts that have focused heavily on the regulation of CFI, and on the prevention of fraud, the new paper, Implementation of Crowdfunding focuses on the successful process and execution of debt and equity investments through this new realm.

As to how the process is moving, here’s what Alon had to say:

“I believe the JOBS Act’s intent is to revitalize the US economy, encourage job creation, and foster domestic innovation. The low barrier to entry of existing crowdfunding platforms, such as RocketHub, has encouraged many individuals to attempt crowdfunding campaigns, without risking the negative financial impact of an unsuccessful raise. This concept is critical to the JOBS Act, and it is clearly important that any regulation proposed acknowledges the nature of crowdfunding, and its unique role in the US economy.”

I very much agree with Alon’s position: “The JOBS Act is the next step towards democratizing fund raising. I adamantly believe social funding is going to dominate the online space for the next five years.”

What is RocketHub’s role in this process currently?

Testifying in Congress about Crowdfund Investing concerns

“RocketHub has been receiving a lot of requests to comment on the act from an implementation perspective. We are uniquely qualified, as one of the largest global platforms, to offer information about trends and user behavior. As a result we were asked to testify in Congress about our intent to offer equity-based crowdfunding.”

What about the remaining concerns about fraud?

“In honesty, and in the spirit of being pragmatic, I believe the risk of loss due to under performance of a legitimate start-up or small business far outweighs the likelihood of loss to investors due to fraud or omission.”

“While some commentators have called for additional anti-fraud protections, I believe that generally, these will only add to the upfront expense of crowdfunding and will not provide sufficient benefits. It is critical the industry recognizes that the costs of these measures would largely be borne by legitimate issuers, not by the few disreputable individuals the regulation is trying to exclude.”

“The whitepaper stresses that portals must be able to uniquely identify each investor, and establish an appropriate account for each investor at a low-cost. Otherwise, too much of the investor’s or issuer’s funds will go towards administration and legal compliance. This is exactly what we are looking to avoid.”

“We cover this in the paper, but we need to remember that portals play a critical role in the equity crowdfunding eco-system. As most crowdfunding issuers will have little experience with securities sales, it will benefit the issuers and the investors if the Portal assists the issuer with securities mechanics. We believe portals can comply with JOBS Act regulation while assisting issuers in allocating and transferring their securities to investors.”

What do you see as the biggest remaining issue?

“Most critical is RocketHub’s recommendation that the SEC launches a pilot program. We recognize that the SEC is responsible for regulating an emerging market. As such, there is limited information available to generate effective regulatory policies. While RocketHub and others have made their data freely available to the SEC’s economist department, I believe there are further steps needed to test the infrastructure, security, and cost of full compliance through the proposed framework.”

“A pilot program would initiate equity crowdfunding, including the data collection and filing process, on a small scale to get feedback on whether the regulation is likely to work as expected in a ‘real world’ situation. RocketHub believes that by administering crowdfunded offerings by a small group of issuers to the retail-investor public, the SEC will effectively simulate the offering process including security registration, offering logistics, and identity verification.”

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Nicely done helping to explain and clarify the shifting and expanding Crowdfunding landscape. Even though Crowdfunding has been around for several years, the addition of Equity-based crowdfunding with the new JOBS really needs clarification and your article does that.

Thank you, as always, Alon, for your contributions to this important area. I look forward to many more conversations in the year to come. Thanks for all you and your organization are working to do. Regards, Alan

It will be very interesting year regardless of pilot program. Pilot programs don’t mean much after the rules are established. Pilots are basically to make sure no bugs in whatever software and not the rule.